Al Gore’s Current TV about to become another Liberal News Outlet Failure

Posted by PITHOCRATES - April 7th, 2012

Week in Review

A lot of people on the Left hate Rush Limbaugh.  And Sean Hannity.  Because they have a lot of people listening to their radio shows.  Numbers one and two in the market.  Something liberal talk radio could never do.  Which is why the Left hates these two guys.  Because the Left always fails going up against conservatives.  Even on cable TV (see Exclusive: Low ratings could end cable deal for Gore’s Current TV by Peter Lauria posted 4/5/2012 on Reuters).

Al Gore’s Current TV has bigger problems to deal with than a potential lawsuit from fired news anchor Keith Olbermann – namely not getting kicked off Time Warner Cable for low ratings.

According to three sources with knowledge of the situation, Time Warner Cable Inc’s carriage agreement with Current TV stipulates that, if the left-leaning political news network fails to meet a minimum threshold for overall viewers in a given quarter, financial penalties such as Current TV being required to increase marketing and promotion spending on the cable operator’s systems are triggered.

If Current TV misses the audience benchmark in two consecutive quarters, another clause is triggered that would allow Time Warner Cable to drop the channel. The condition was built into the most recent distribution pact between the two parties, which was signed in 2010…

If it was not for Olbermann’s show, which averaged a total of 177,000 viewers per night, Current TV likely would have missed Time Warner Cable’s viewership benchmark, said one of the sources.

When you’re the party of decriminalizing drugs and providing birth control and abortion you’re appealing to the baser instincts of people.  People who enjoy pleasure more than deep philosophical thought.  Which is who the Left appeals to.  Especially in their courtship of the youth vote.  And these people who want to party and enjoy the now to the fullest aren’t going to tune into any program talking politics.  They’ll participate in the Occupy Wall Street and other protests because protesting is fun.  As is the sex and drugs in their little tent cities.  Just like it was back in the Sixties when the hippies created the sex and drugs scene.  But they don’t want to hear their parents or people who may be friends of their parents talking politics.

This is the consequence of dumbing down society.  It’s easier to buy votes.  But a large portion of your political base will be uninformed and unaware.  And not get involved in politics.  Unlike the conservative opposition.  Who take great offense of the dumbing down of society.  And the societal decay.  And they will tune into programs talking politics.  Especially the ones in opposition to the thing they blame for that dumbing down and societal decay.  Liberalism.

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The Eurozone to fail because they will Never have the Fiscal or Political Union Required to make a Currency Union Work

Posted by PITHOCRATES - December 11th, 2011

Week in Review

The Eurozone is doomed.  For the things they say they need to do they just can’t agree to do (see Like it or not, the euro is doomed by Hibah Yousuf posted 12/9/2011 on CNN Money).

European leaders, particularly from France and Germany — the eurozone’s two largest economies — have had very different views on the ultimate role of the fiscal compact, and the latest proposals are just “too little, too late, and miss the structural problem,” said Leach.

Germany has been strongly opposed to sending the ECB down a path of printing money to stabilize Europe’s economy.

“Printing money is associated with hyperinflation, the collapse of the Weimer Republic, and the rise of Hitler,” noted Leach. “From a German perspective the question is that, once the ECB has lost its virginity printing money, just how promiscuous could it become.”

Hyperinflation and the collapse didn’t happen when they started printing money.  These happened after they printed a lot of money.  It was a progression.  For it takes time to make your currency worthless.  Which is something the Germans don’t want to experience again.  Because it didn’t end well for them the first time.

Afseth said the fiscal union needs to focus more on boosting economic growth, rather than just pushing for budgetary discipline and fiscal austerity. And it needs to advocate for pooling the eurozone’s debt together, so the region can issue eurobonds, another highly contentious topic among Europe’s political leaders.

Despite the multitude and extent of the political disagreements that could lead to the eurozone’s crumble in the near-term, more optimistic experts say Europe’s leaders will likely find a middle ground to avoid the severe economic consequences.

“The political arguments are strong, but they come against a hard economic reality,” said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh, Scotland, noting that the costs for a single country leaving the eurozone could amount to at least 15% or 25% of its economy, if not more.

There are those who want the European Central Bank (ECB) to assume the debt of the member states.  Like the U.S. did in 1790.  But the Americans already had a currency union.  And a political union.  As well as a common language.  A common heritage.  Common institutions.  A national post office.  And a lot of other common things.  With only about 100 years of history.  And despite all of this the idea of assumption did not go over well.  It took a fight.  And some wheeling and dealing.  Europe, on the other hand, has only a common currency.  And they’ve been around for about 2,000 years of history.  So chances are all they will have is a common currency.  And they may not be able to save that.

The Eurozone was the answer to the United States.  The world’s number one economy.  Because within her borders was the largest free trade zone in the world.  Which exploded her economic growth to the top spot.  The Eurozone was to replicate that in Europe.  A united states of Europe.  And it worked.  But it probably won’t last.  If only one nation drops out of the Eurozone it could reduce the economy of the united states of Europe by 25%.  And if one goes more will probably follow.  This economic powerhouse will be united no longer.  And it will probably plunge Europe into recession.

“A break-up could result in very major recession in Europe, and so it’s hard to imagine how any politicians and governments could possibly make a conscious, voluntary decisions to leave the eurozone,” said Milligan.

So clearly the Euro failing will be too painful to endure.  So painful that the member states will try everything within their power to prevent that.  Including trying to get the ECB to issue Eurobonds.  And print money.  Much like Richard Nixon did when he abandoned the gold standard in 1971.  Saying he was then a Keynesian, too.  And the U.S. spun out of control with double digit inflation rates.  High unemployment.  Stagflation.  And it wasn’t Keynesian economics that finally fixed this mess.  It was the anti-inflation policies of Paul Volcker of the central bank.  He raised interest rates.  And stopped printing money.  This fixed the inflation problem.  Then Ronald Reagan fixed the economic problem.  By cutting taxes.  Something the Europeans may not be physiologically able to do.

So it really doesn’t matter what they do.  For the end will be the same.  It may be sooner or later.  But the Eurozone will most probably dissolve.  Because they will never have the fiscal or political union required to make a currency union work.

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Paul Krugman likes Keynesian Economics because it is more Political than Austrian Economics

Posted by PITHOCRATES - December 11th, 2011

Week in Review

Keynesian economics is a lot like the first 2 rules of business.  Rule number 1: the customer is always right.  Rule number 2: when the customer is wrong see rule number 1.

Keynesian economics has a similar set of rules.  Keynesian economic rule number 1: Keynesian economics always works.  Keynesian economic rule number 2: when Keynesian economics doesn’t work see Keynesian economics rule number 1.

Paul Krugman holds these Keynesian economic rules sacred.  He can go and an on about Keynesian macroeconomic principles to explain why the economy is still wallowing in recession despite massive doses of Keynesian economic stimulus.  Because it always goes back to these two Keynesian economic rules.  You see, in his world there is no such thing as a Keynesian failure.  For when there is there is a reason.  And that reason is that we didn’t go Keynesian enough.

It’s obvious that Keynesian economics works.  Just look at Keynesian economics rules 1 &2.  Need I say more?  At least, this is ultimately the argument Paul Krugman makes.  Which is purely political.  And rather ironic.  For he calls the non-political economic system, Austrian economics, political (see Krugman Disses Hayek by Peter Klein posted 12/6/2011 on The Independent Institute).

Krugman closes with the unintentionally funny snark that “the Hayek thing is almost entirely about politics rather than economics.” I suspect if one polled professional economists on which recent Nobel Laureate received the prize not so much for technical contributions, but because the Nobel committee wished to make a political statement, the answer would overwhelmingly be Krugman. I don’t know anyone who thinks Krugman’s work on trade and geography merited the Nobel at the relatively tender age of 55. Indeed, the Krugman thing is almost entirely about politics rather than economics. Quelle Ironie!

Hayek’s Austrian economics does not feature the government playing an active role.  Keynesian economics does.  That’s why it’s the economics system of governments everywhere.  Because it empowers them.  Gives them ‘authority’ to tax and spend and ‘stimulate’.  Because a lot of macroeconomic graphs say it works despites all empirical evidence that it doesn’t.

Now if that doesn’t say politics nothing does.  Keynesian economics is political economics.  Which explains why the biggest of Big Governments choose it for their economics.  Not because it works.  But because it gives them political power.

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President Obama uses Class Warfare to Increase Spending and Reward Political Cronies

Posted by PITHOCRATES - September 19th, 2011

They have Learned in the UK that Government can’t Pay for Everything

China may be subsidizing high-speed rail.  But in the UK, the government is moving the other way.  Because it is just too costly (see Arriva Trains: Fare rise in Wales 2% lower than England posted 9/19/2011 on the BBC News Wales).

The Welsh Government has told Arriva Trains Wales it can increase prices by 1% above the inflation rate.

Last month the UK government announced an average increase in England of 3% over inflation…

Tony Miles, from Modern Railways magazine, said the decision was good news for Welsh commuters but it would impact on the Welsh Government’s budget.

He said: “This is a policy decision by the Welsh Government, which is very much in line with their outlook that the burden of financing public transport should fall more on taxpayers centrally than on the individual passengers…

“The UK Government wants to shift the cost of the railways more away from taxpayers and towards users.

The UK went farther down the socialist road than the Americans.  They nationalized a lot of their industries.  Nationalized their health care.  And, of course, their transportation.  Now there are efforts to reverse this.  Continuing on the work of the great Margaret Thatcher.

There are some in the UK that have a novel idea.  To let people pay for a train ticket.  If they want a train ticket.  Imagine that.  Paying your own way.  How fair.  And rational.  But not all are keen on the idea.  For in Wales they want everyone to pitch in and pay for train tickets.  Even those who don’t ride on the train.

They have learned in the UK that government can’t pay for everything.  And some are now trying to undo years of government growth.  In transportation.  And elsewhere.  To unleash more free market capitalism.  That they were so kind to introduce to the Western World all those years ago.

Was the Great Depression the Worst Economy Ever before Obama Took Office?

In America, though, government continues to grow.  Even with election losses.  And economic malaise (see End of Recession Doesn’t Mean Good Times Return Right Away by David Johnson posted 9/19/2011 on Random Samplings).

Numbers just released by the Census Bureau, however, illustrate that while the recession may technically be over, household economic conditions did not improve…

During the 2010 calendar year, median household income was $49,445, 2.3 percent lower than in 2009 after adjusting for inflation.

The Obama administration’s Recovery Summer ended the Bush recession in 2010.  Or so they say.  The unemployment rate is still above 9%.  If you factor in the underemployed and those who’ve given up looking for a job it’s closer to 16%.  And real household income is down 2.3%.

But just imagine how bad things would have been if Obama didn’t end the Bush Recession with his Recovery Summer.  People would be saying that the Great Depression was the worst economy ever.  Until Obama took office.

To end the Bush recession Obama spent $800 billion in ‘stimulus’ spending.  Which failed.  Because he’s asking for another $450 billion stimulus package.  Despite the first one failing.  Well, it may have failed to stimulate the economy.  But it did stimulate government.

Only Union Jobs are Good Jobs in the Obama Admin because only Union Jobs Fill Democrat Coffers

So we know that their stimulus spending fails to stimulate the economy.  But why?  Is it because they don’t understand things economic?  Or is it because their stimulus has more political goals than economic?  Perhaps it’s both (see Illinois among worst states to do business: Survey by Ameet Sachdev posted 9/19/2011 on the Chicago Tribune).

Illinois ranked among the three worst states for business, according to a survey of U.S. corporate executives released Monday…

Taxes and high costs were among the factors that contributed to the state’s poor showing in the survey. California was deemed to have the worst business climate, followed by New York and Illinois.

So California, Illinois and New York have the worst business climates.  Because of taxes and high costs.  No surprise, really.  For these are big blue Democrat states.  With big blue Democrat cities.  And big public sector unions.  At both the state and municipal levels.  Which is why they have such high taxes and costs.  Those public sector pension and health care benefits are absolutely killing their economies with the high taxes required to fund them.

The Democrats can say what they want.  But they are not business-friendly.  They are only friendly to political allies.  Unions.  Teachers.  And public sector employees.  Which is why businesses want to leave these Democrat areas.  Not to exploit cheap labor.  But to stop their own exploitation by these Democrat strongholds.

Illinois recently increased its income tax rate, which has prompted several companies, including Chicago-based CME Group, to consider leaving the state.

Texas, North Carolina and South Carolina were viewed as having the best business climates, according to the survey.

Boeing built their new 787 Dreamliner plant in South Carolina.  But the Obama administration is trying to shut that plant down.  Why?  Because they don’t like South Carolina.  Or its people.

You see, all jobs are not good jobs.  As the Obama administration sees it.  And these new South Carolinian jobs are not good jobs.  Because they are nonunion jobs.  No union means no union dues.  And no money to flow into Democrat coffers.  So the Obama administration has nothing to gain politically.  And that’s why they are using the power of the National Labor Relations Board to shut that plant down.  And make Boeing expand production in Seattle.  Where the jobs will be union jobs.  And union money will flow into Democrat coffers.  Via union dues.

President Obama and the Democrats Prefer Crony Capitalism over Free Market Capitalism

We call this crony capitalism.  Some may even say extortion.

Crony capitalism is the opposite of free market capitalism.  Where merit wins the day.  In crony capitalism, though, it’s who you know.  And what kind of political power you have (see Obama administration ‘pressured Air Force general to change testimony’ by Toby Harnden posted 9/16/2011 on The Telegraph).

According to Republicans on Capitol Hill, General William Shelton, head of Air Force Space Command, told them in a closed session the White House urged him to alter his testimony about the Pentagon’s concerns about a new wireless project by a satellite broadband company…

LightSquared, based in Virginia, is funded by the multi-millionaire Philip Falcone, a frequent donor to Democrats. The satellite and broadband communications company plans to build a nationwide, 4G phone network that many generals believe would seriously hinder the effectiveness of high-precision GPS receiver systems used by the military…

The row over the allegedly improper intervention came as a Republican-controlled House of Representatives Committee investigated a federal loan guarantee to Solyndra, a solar firm also tied to a major Democratic contributor, which failed after receiving a half-billion US government loan guarantee.

A spokesman for Gen Shelton said that his testimony was “his own, supported by and focused purely on documented tested results”.

LightSquared insisted it had not sought to interfere with the properly regulatory process. The White House said reviewing congressional testimony was routine.

Interesting.  The White House says this is just routine.  Which it apparently is.  Whether you’re funneling tax dollars to a green energy company.  Connected to a rich Democrat donor.  Or trying to throw a contract to a communications company.  Also connected to a rich Democrat donor.  Even if it compromises national security.

It’s just business.  And our politicians are just business people.  In the business of rewarding political friends.  In return for generous campaign contributions.

So much for hope, change and transparency.

If You Confiscated all the Rich’s Income it would Wipe out Obama’s Deficit…for One Year

Crony capitalism.  A little extortion.  Mixed in with a generous helping of class warfare.  In other words, Obama politics (see Obama calls for broad tax increases by Stephen Dinan posted 9/18/2011 on The Washington Times).

President Obama on Monday proposed a deficit reduction plan that calls for about $3 in new tax increases for every dollar in additional spending cuts as he seeks to put his imprint on the ongoing talks with Congress over reducing the government’s staggering debt…

“This is not class warfare, it’s math,” Mr. Obama said in the White House’s Rose Garden as he laid out the outlines. “The money’s got to come from some place.”

Real incomes are down.  Unemployment is still above 9%.  If you count the underemployed and those who have given up looking for work the actual number is closer to 16%.  So how best to create more jobs to help people go back to work?  And boost those real incomes?  Well, if you’re a member of the Obama administration, you raise taxes.

But this won’t help the employment numbers.  So why do it?  Because it is class warfare.  Despite the president’s denial that it is.  For there is no other reason to do this.  It won’t help the economy.  And it won’t help reduce the debt.

If you took all income from those earning $200,000 or more you’ll be lucky to get $2 trillion.  At least this is all they had in 2008.

(Source:  SOI Tax Stats – Individual Income Tax Rates and Tax Shares)

See?  You can raise tax rates to 100% on the rich but it won’t help.  If you confiscated all their income you’d raise a lot of money, yes.  Enough to wipe out the Obama’s $1.6 trillion deficit.  For one year.  But it will be $1.6 trillion the following year.  Unless you cut spending.  Because you can take this money only once.  Unless these people agree to keep producing all this wealth as indentured servants.  Which I don’t see happening.

So Broke that We Must Raise Taxes but not too Broke that We can’t Throw $7 Billion to the USPS

So it is class warfare.  And cronyism.  Helping those who help them.  With taxpayer dollars.  Which is why they need to raise taxes.  Not to retire the debt.  But to help their political supporters (see President Obama deficit plans back ending Saturday mail by Ed O’Keefe posted 9/19/2011 on The Washington Post).

The White House is also calling on Congress to return $7 billion that USPS paid into a federal retirement fund to the delivery service to help pay for other retirement and health-care costs. Obama’s plans also would allow the Postal Service to raise stamp prices beyond the rate of inflation to better match the cost of delivery…

Though the Postal Service is a self-funding entity that doesn’t accept taxpayer dollars, it is a significant piece of the unified federal budget because its workers and retirees draw benefits from federal workers’ compensation, retirement and health-care accounts.

The country is so broke that it must raise taxes.  But it is not too broke that it can’t throw $7 billion to Obama’s friends in the USPS.

We are Regressing back to the Totalitarian Regimes of the Old World

All this talk about balance approach to deficit reduction?  And getting the rich to pay their fair share?  It’s all class warfare. To increase taxes.  To keep funding important political constituencies.  It has nothing to do with deficit reduction.  The numbers are just too large to be able to reduce the deficit with taxes alone.  You have to cut spending.

And this just isn’t going to happen with Democrats in power.  Because government spending is their lifeblood.  Their economic policies don’t work.  And they’re not designed to work.  They have but one purpose.  Politics.  Rewarding political favors.  With taxpayer dollars.

And they will sacrifice anything to keep spending.  The economy.  Our real incomes.  Our national security.  Even the American Dream.  Our liberty.  For we are regressing back to the totalitarian regimes of the Old World.  Where, if you’re not politically connected, you are fast becoming a second class citizen.

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FUNDAMENTAL TRUTH #39: “Socialism is easier said than done.” -Old Pithy

Posted by PITHOCRATES - November 9th, 2010

Capitalism vs. Socialism

Socialism as a political/economic theory is pretty involved.  With an involved history.  And if you’re suffering insomnia one night I recommend reading some of it with a glass of warm milk.  Should put you right to sleep.

Let me simplify it a bit.  To begin with, by ‘socialism’ I mean any form of collectivism (socialism, communism, fascism, statism, social democracy, etc.).  They’re all similar.  Just variations on a theme.  And they all suffer the same defects.  Three of which I summarize here:

  • Public (instead of private) ownership of the means of production, distribution, and exchange
  • Put the common good before individual wants or desires
  • Equality of outcomes

That’s not everything.  But it’s the 3 big reasons why socialism fails.  Basically, socialism is the opposite of capitalism.  In fact, socialism was created to defeat capitalism.  The East-West rivalry during the Cold War was the final showdown between the two systems.  And we know how that turned out.  (In case you don’t, capitalism won).

Public (instead of private) ownership of the means of production, distribution, and exchange

Mikhail Gorbachev asked the great Margaret Thatcher how she fed her people.  Her reply stunned him.  She did nothing.  The Soviet Union was struggling to feed her people with their socialist command economy.  And they couldn’t do it.  They who had great tracts of some of the most fertile farmland in the world.  And yet they still had to import grain from their arch nemesis.  The United States.  To keep famine at bay.  The free markets of capitalism didn’t have to struggle to feed her people, though.  The United States had food to spare.  And even though Great Britain is an island nation that had to import much of her food, there were no famine fears in Great Britain.  The socialist just couldn’t understand how that was possible.

One of the problems with socialism is that it ignores market forces.  And perverts the economic decision making process.  In a free market, market forces maximize the use of scarce resources that have alternative uses.  The market does this through the laws of supply and demand.  And prices.  Things high in demand but low in supply have high prices.  This ensures there is enough of that supply available for those who really need it.  Anyone who pushed a car to the gas pump during the gas shortages in the 1970s understands this.  When the Nixon administration kept prices artificially low, everyone bought and used gas until the supply ran out.  If we had let prices rise to their true market price, those who didn’t absolutely need gas would have cut back on their purchases, leaving gas available to those who really needed it and were willing to pay a high price for it.

When the state takes over the economy, politicians make economic decisions for political reasons.  They ignore the ‘invisible hand’ of the market place.  In the Soviet Union, the state boasted about its industrial output and filled stores with tractor parts no one wanted to buy.  Meanwhile, people stood in line for hours in hopes of buying soap or toilet paper.  And no matter how hard they tried they just couldn’t increase the yield of some of the world’s most fertile farmland.

Put the common good before individual wants or desires

Doing what’s best for the common good sounds noble.  And easy to do.  We all agree our children should be safe.  And should have enough to eat.  And that our schools should serve them breakfast each morning.  And teach them about contraception.  Well, okay, it’s not that easy to do.  Because different people want different things.  And different people think different things are better for the common good.

This is the problem of putting the common good before our individual wants or desires.  Few can agree on what the common good is.  We know our own wants and desires.  But we have no idea what other people want or desire.  Unless we ask them.  But does that even help in determining the common good?  Get a group of your friends and family together.  Make it at least 10 people.  Now get the ten of you to agree on a movie to see.  You know what will happen?  First of all, you’ll waste a lot of time saying, “I don’t care.  What do you want to see?”  Then people will start suggesting movies.  And for every one suggested, someone will vote it down.  This will go on until you finally arrive at a movie that no one wants to see.  But because it’s the movie everyone hates the least, everyone’s willing to settle for it.

Now imagine that little exercise with a thousand people.  The agreeing process will be even more difficult.  In fact, it may be impossible.  It is very unlikely that one thousand people will agree to anything.  And if they try they will waste an enormous amount of time in the process.  No.  Someone will have to decide for the group.  Someone will have to weigh everyone’s opinion and decide what is best for the common good. No matter how many people disagree with this one person’s decision.  F.A. Hayek wrote a book about this.  The Road to Serfdom.  He said socialism ends in dictatorship.  Because there’s no efficient means to determine what’s best for the common good.  He predicted this would happen in Germany with their creeping state socialism.  And Adolf Hitler proved him right.

Equality of Outcomes

If a business has a good year, they tend to be more generous at the holidays.  Let’s say a business owner wants to give out some Christmas bonuses to thank her employees for all their hard work.  She goes to her accountant.  Asks what’s the maximum she can give out without giving herself any cash-flow problems at the beginning of the new year (taxes, insurance, etc.).  The accountant crunches some numbers and says $50,000.  If she has 15 employees, that’s about $3,300 each.  Which should make for a pretty Merry Christmas.  Now, let’s say she has 125 employees.  That works out to a $400 bonus per employee.   Which won’t be quite as merry.

The lesson learned?  The more people included in the getting of something, the less each one gets.  And so it is with socialism.  The only way to get equality in outcomes is to give everyone less.  Sure, we can afford to give Congress people a Cadillac health insurance plan.  But we could never afford to give the same coverage to everyone.  To be able to give coverage to all the people, each person will have to get less.

And they will continue to get less.  As costs go up, it is difficult to maintain the same level of government benefits.  Eventually, they’ll have to raise taxes to cover the higher costs.  And when they can’t raise taxes anymore, they’ll have to reduce the amount of benefits.  Or, in other words, they’ll have to ration benefits.  A bureaucrat will have to decide who should get what.  Which could easily turn health care into politics.  A political opponent needs an expensive cancer treatment?  So sorry.  We’ve already reached our quota this year.  Try again next year.

Socialism is Slavery

What it comes down to is this; socialism really fails for one reason.  It goes against human nature.  It only works when we sacrifice our wants and desires so that others may have their wants and desires.  It’s not trying to keep up with the Jones.  It’s helping the Jones get ahead of you.  It’s living your life to serve others.  And there’s another word for that.  Slavery.  Hence the title of Hayek’s book.  The Road to Serfdom.  For socialism to work, the state must become a dictatorship.  And we must become its slaves.  But few willingly volunteer for servitude.  So, given the choice, we will ultimately choose to make socialism fail.

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LESSONS LEARNED #27: “Yes, it’s the economy, but the economy is not JUST monetary policy, stupid.” -Old Pithy

Posted by PITHOCRATES - August 19th, 2010

WHAT GAVE BIRTH to the Federal Reserve System and our current monetary policy?  The Panic of 1907.  Without going into the details, there was a liquidity crisis.  The Knickerbocker Trust tried to corner the market in copper.  But someone else dumped copper on the market which dropped the price.  The trust failed.  Because of the money involved, a lot of banks, too, failed.  Depositors, scared, created bank runs.  As banks failed, the money supply contracted.  Businesses failed.  The stock market crashed (losing 50% of its value).  And all of this happened during an economic recession.

So, in 1913, Congress passed the Federal Reserve Act, creating the Federal Reserve System (the Fed).  This was, basically, a central bank.  It was to be a bank to the banks.  A lender of last resort.  It would inject liquidity into the economy during a liquidity crisis.  Thus ending forever panics like that in 1907.  And making the business cycle (the boom – bust economic cycles) a thing of the past.

The Fed has three basic monetary tools.  How they use these either increases or decreases the money supply.  And increases or decreases interest rates.

They can change reserve requirements for banks.  The more reserves banks must hold the less they can lend.  The less they need to hold the more they can lend.  When they lend more, they increase the money supply.  When they lend less, they decrease the money supply.  The more they lend the easier it is to get a loan.  This decreases interest rates (i.e., lowers the ‘price’ of money).  The less they lend the harder it is to get a loan.  This increases interest rates (i.e., raises the ‘price’ of money). 

The Fed ‘manages’ the money supply and the interest rates in two other ways.  They buy and sell U.S. Treasury securities.  And they adjust the discount rate they charge member banks to borrow from them.  Each of these actions either increases or decreases the money supply and/or raises or lowers interest rates.  The idea is to make money easier to borrow when the economy is slow.  This is supposed to make it easier for businesses to expand production and hire people.  If the economy is overheating and there is a risk of inflation, they take the opposite action.  They make it more difficult to borrow money.  Which increases the cost of doing business.  Which slows the economy.  Lays people off.  Which avoids inflation.

The problem with this is the invisible hand that Adam Smith talked about.  In a laissez-faire economy, no one person or one group controls anything.  Instead, millions upon millions of people interact with each other.  They make millions upon millions of decisions.  These are informed decisions in a free market.  At the heart of each decision is a buyer and a seller.  And they mutually agree in this decision making process.  The buyer pays at least as much as the seller wants.  The seller sells for at least as little as the buyer wants.  If they didn’t, they would not conclude their sales transaction.  When we multiply this basic transaction by the millions upon millions of people in the market place, we arrive at that invisible hand.  Everyone looking out for their own self-interest guides the economy as a whole.  The bad decisions of a few have no affect on the economy as a whole.

Now replace the invisible hand with government and what do you get?  A managed economy.  And that’s what the Fed does.  It manages the economy.  It takes the power of those millions upon millions of decisions and places them into the hands of a very few.  And, there, a few bad decisions can have a devastating impact upon the economy.

TO PAY FOR World War I, Woodrow Wilson and his Progressives heavily taxed the American people.  The war left America with a huge debt.  And in a recession.  During the 1920 election, the Democrats ran on a platform of continued high taxation to pay down the debt.  Andrew Mellon, though, had done a study of the rich in relation to those high taxes.  He found the higher the tax, the more the rich invested outside the country.  Instead of building factories and employing people, they took their money to places less punishing to capital.

Warren G. Harding won the 1920 election.  And he appointed Andrew Mellon his Treasury secretary.  Never since Alexander Hamilton had a Treasury secretary understood capitalism as well.  The Harding administration cut tax rates and the amount of tax money paid by the ‘rich’ more than doubled.  Economic activity flourished.  Businesses expanded and added jobs.  The nation modernized with the latest technologies (electric power and appliances, radio, cars, aviation, etc.).  One of the best economies ever.  Until the Fed got involved.

The Fed looked at this economic activity and saw speculation.  So they contracted the money supply.  This made it hard for business to expand to meet the growing demand.  When money is less readily available, you begin to stockpile what you have.  You add to that pile by selling liquid securities to build a bigger cash cushion to get you through tight monetary times.

Of course, the economy is NOT just monetary policy.  Those businesses were looking at other things the government was doing.  The Smoot-Hartley tariff was in committee.  Across the board tariff increases and import restrictions create uncertainty.  Business does not like uncertainty.  So they increase their liquidity.  To prepare for the worse.  Then the stock market crashed.  Then it got worse. 

It is at this time that the liquidity crisis became critical.  Depositors lost faith.  Bank runs followed.  But there just was not enough money available.  Banks began to fail.  Time for the Fed to step in and take action.  Per the Federal Reserve Act of 1913.  But they did nothing.  For a long while.  Then they took action.  And made matters worse.  They raised interest rates.  In response to England going off the gold standard (to prop up the dollar).  Exactly the wrong thing to do in a deflationary spiral.  This took a bad recession to the Great Depression.  The 1930s would become a lost decade.

When FDR took office, he tried to fix things with some Keynesian spending.  But nothing worked.  High taxes along with high government spending sucked life out of the private sector.  This unprecedented growth in government filled business with uncertainty.  They had no idea what was coming next.  So they hunkered down.  And prepared to weather more bad times.  It took a world war to end the Great Depression.  And only because the government abandoned much of its controls and let business do what they do best.  Pure, unfettered capitalism.  American industry came to life.  It built the war material to first win World War II.  Then it rebuilt the war torn countries after the war.

DURING THE 1980s, in Japan, government was partnering with business.  It was mercantilism at its best.  Japan Inc.  The economy boomed.  And blew great big bubbles.  The Keynesians in America held up the Japanese model as the new direction for America.  An American presidential candidate said we must partner government with business, too.  For only a fool could not see the success of the Japanese example.  Japan was growing rich.  And buying up American landmarks (including Rockefeller Center in New York).  National Lampoon magazine welcomed us to the 90s with a picture of a Japanese CEO at his desk.  He was the CEO of the United States of America, a wholly owned subsidiary of the Honda Motor Company.  The Japanese were taking over the world.  And we were stupid not to follow their lead.

But there was no invisible hand in Japan.  It was the hand of Japan Inc.  It was Japan Inc. that pursued economic policies that it thought best.  Not the millions upon millions of ordinary Japanese citizens.  Well, Japan Inc. thought wrong. 

There was collusion between Japanese businesses.  And collusion between Japanese businesses and government.  And corruption.  This greatly inflated the Japanese stock market.  And those great big bubbles finally burst.  The powerful Japan Inc. of the 1980s that caused fear and trembling was gone.  Replaced by a Japan in a deflationary spiral in the 1990s.  Or, as the Japanese call it, their lost decade.  This once great Asian Tiger was now an older tiger with a bit of a limp.   And the economy limped along for a decade or two.  It was still number 3 in the world, but it wasn’t what it used to be.  You don’t see magazine covers talking about it owning other nations any more.  (In 2010, China took over that #3 spot.  But China is a managed economy.   Will it suffer Japan’s fate?  Time will tell.)

The Japanese monetary authorities tried to fix the economy.  Interest rates were zero for about a decade.  In other words, if you wanted to borrow, it was easy.  And free.  But it didn’t help.  That huge economic expansion wasn’t real.  Business and government, in collusion, inflated and propped it up.  It gave them inflated capacity.  And prices.  And you don’t solve that problem by making it easier for businesses to borrow money to expand capacity and create jobs.  That’s the last thing they need.  What they need to do is to get out of the business of managing business.  Create a business-friendly climate.  Based on free-market principles.  Not mercantilism.  And let that invisible hand work its wonders.

MONETARY POLICY CAN do a lot of things.  Most of them bad.  Because it concentrates far too much power in too few hands.  The consequences of the mistakes of those making policy can be devastating.  And too tempting to those who want to use those powers for political reasons.  As we can see by Keynesian ‘stimulus’ spending that ends up as pork barrel spending.  The empirical data for that spending has shown that it stimulates only those who are in good standing with the powers that be.  Never the economy.

Sound money is important.  The money supply needs to keep pace with economic expansion.  If it doesn’t, a tight money supply will slow or halt economic activity.  But we have to use monetary policy for that purpose only.  We cannot use it to offset bad fiscal policy that is anti-business.  For if the government creates an anti-business environment, no amount of cheap money will encourage risk takers to take risks in a highly risky and uncertain environment.  Decades were lost trying.

No, you don’t stimulate with monetary policy.  You stimulate with fiscal policy.  There is empirical evidence that this works.  The Mellon tax cuts of the Harding administration created nearly a decade of strong economic growth.  The tax cuts of JFK were on pace to create similar growth until his assassination.  LBJ’s policies were in the opposite direction, thus ending the economic recovery of the JFK administration.  Ronald Reagan’s tax cuts produced economic growth through two decades. 

THE EVIDENCE IS there.  If you look at it.  Of course, a good Keynesian won’t.  Because it’s about political power for them.  Always has been.  Always will be.  And we should never forget this.

www.PITHOCRATES.com

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LESSONS LEARNED #25: “War is costly. Peace, too.” -Old Pithy

Posted by PITHOCRATES - August 5th, 2010

AT THE HEIGHT of the Roman Empire, the empire reached from North Africa to Britannia (England), from Hispania (Spain) to Mesopotamia (approximately modern day Iraq).  When Roman power ruled the civilized world, there was peace.  The Pax Romana (Roman Peace).  The Romans built empire through conquest.  And Rome grew rich with the spoils of conquest.  For awhile, peace was only those quiet intervals between growth and conquest.  But with secure borders, a uniform government, a rule of law, a stable currency, bustling trade & markets and a military to be the world’s policeman, peace broke out.  For some 200 years.

Life was good for the Roman citizen.  As well as for those living in the empire.  The Romans modernized the provinces they conquered.  Made life better.  Even for the conquered people.  Although there were those who hated being subjugated by a foreign power.

Reg: They bled us white, the bastards. They’ve taken everything we had. And not just from us! From our fathers, and from our father’s fathers.

Loretta: And from our father’s father’s fathers.

Reg: Yeah.

Loretta: And from our father’s father’s father’s fathers.

Reg: Yeah, all right Stan, don’t belabor the point. And what have they ever given us in return?

Revolutionary I: The aqueduct?

Reg: What?

Revolutionary I: The aqueduct.

Reg: Oh. Yeah, yeah, they did give us that, ah, that’s true, yeah.

Revolutionary II: And the sanitation.

Loretta: Oh, yeah, the sanitation, Reg. Remember what the city used to be like.

Reg: Yeah, all right, I’ll grant you the aqueduct and sanitation, the two things the Romans have done.

Matthias: And the roads.

Reg: Oh, yeah, obviously the roads. I mean the roads go without saying, don’t they? But apart from the sanitation, the aqueduct, and the roads…

Revolutionary III: Irrigation.

Revolutionary I: Medicine.

Revolutionary IV: Education.

Reg: Yeah, yeah, all right, fair enough.

Revolutionary V: And the wine.

All revolutionaries except Reg: Oh, yeah! Right!

Rogers: Yeah! Yeah, that’s something we’d really miss Reg, if the Romans left. Huh.

Revolutionary VI: Public bathes.

Loretta: And it’s safe to walk in the streets at night now, Reg.

Rogers: Yeah, they certainly know how to keep order. Let’s face it; they’re the only ones who could in a place like this.

All revolutionaries except Reg: Hahaha…all right…

Reg: All right, but apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, the fresh-water system and public health, what have the Romans ever done for us?

Revolutionary I: Brought peace?

Reg: Oh, peace! Shut up!

(From Monty Python’s The Life of Brian, 1979.)

Maintaining a peaceful empire is costly.  As people got more accustomed to peace and plenty, they began to complain about taxes.  Citizens refused to volunteer to serve in the Roman Legions maintaining that peace.  Barbarians began to serve in the Legions.  Some rose to command them.  Some Roman commanders came from the very people they were fighting in the border regions.  Soon Rome would rely on mercenaries (hired soldiers) to defend their borders.  All of this cost the empire.  It had to pay more and more to maintain the loyalty of the military.  Ditto for the huge bureaucracy administrating the empire.  And they lost control.  Trouble on the borders and economic collapse ended the peace.  And, ultimately, the empire.  The civilized world broke down and collapsed.  And barbarian leaders on the borders, hungry for conquest, attacked.  Plunging the former Roman provinces into war and instability.

RISING FROM THE ashes of the Roman Empire were the seeds of new empires.  And the ground that proved most fertile was the northern limit of the old empire.  England.

England started to assert herself with the growth of her navy.  With her borders secured, a uniform government, a rule of law, a stable currency, bustling trade & markets and a military to be the world’s policeman, peace broke out.  Again.  For about a hundred years.  During the Industrial Revolution.  After the defeat of Napoleon. 

Imperial Britain stretched across the globe.  The sun never set on the British Empire.  And wherever she went, she brought the rule of law, modernity, a sound economy and political stability.  Her old colonial possessions went on to be some of the richest, most prosperous and peaceful nations in the world.  India.  Australia.  New Zealand.  South Africa.  Canada.  And, of course, the United States of America.  She achieved her century of peace (Pax Britannia) by a balance of power.  She maintained peace by intervening in disputes, often on the side of the weaker nation.  She prevented stronger, aggressive nations from threatening her weaker neighbors.   And she provided a safe environment for the weaker nation to live peacefully in the shadows of stronger, more aggressive neighbors.

For a hundred years Britannia kept the peace.  In large part due to her Royal Navy, the most powerful and potent navy at the time.  If you ate any imported food or used any imported goods, it was thanks to the Royal Navy that kept the world’s sea lanes safe.  But this peace came with a price.  The rise of nationalism, the quest of new empires to establish their own overseas colonies and a change in the balance of power in Europe with the rise of Germany added to that price.  And then a shot fired in Sarajevo by a Serbian terrorist ignited a tinderbox.  The assassination of Archduke Franz Ferdinand by Gavrilo Princip started World War I.  The most bloody and expensive war at the time, it bankrupted Great Britain and ended her empire.  And left the world a less safe place. 

From the ashes of World War I rose new leaders with aspirations of world conquest.  Fascist Italy led by Benito Mussolini.  Nazi Germany led by Adolf Hitler.  Communist Russia led by Joseph Stalin.  Imperial Japan led by Hideki Tojo.  And the nation that led the victors in World War II would, by default, become the new world power.  The new world policeman.  The United States of America.

SO WHAT HAPPENED during the inter-war years that led to World War II?  War exhausted Britain and France.  Neither had the stomach for another war.  Britain continued to rely on the Royal Navy for protection (as an island nation, sea power is indispensable).  France built fixed fortifications (the Maginot Line).  Both were primarily defensive strategies. 

In America, General Billy Mitchell demonstrated the vulnerability of battleships to air power by sinking a battleship with an airplane (greatly flustering the naval high command).  Colonel George S. Patton developed an armored doctrine for an unenthused army and eventually transferred back to the horse cavalry.  Meanwhile, Imperial Japan was building aircraft carriers.  And Nazi Germany, Fascist Italy and Communist Russia developed air and armored doctrine while fighting in the Spanish Civil War.

Fascist Italy attacked Ethiopia in 1935 to rebuild the Roman Empire and make the Mediterranean Sea a Roman lake once again.  Nazi Germany launched World War II in 1939 by an armored assault on Poland with tactical air support.  Poland resisted with horse cavalry.  And lost.  Imperial Japan attacked Pearl Harbor in 1941 to destroy American naval power in the Pacific.  They did a lot of damage.  But the American carriers, their prime objective, were at sea.  They would eventually meet those carriers later at the Battle of Midway.  Where they would lose four of their best carriers and many of their best aviators.  This tipped the balance of power in the Pacific to the Americans.

America was ill-prepared for war.  But American industry, the Arsenal of Democracy, ramped up and built the planes, tanks, guns, rifles and ships that would win the war.   It would come with a heavy price tag.  Global wars typically do.  Had there been a balance of power that would have checked the territorial ambitions of the aggressor nations, it would have been a different story.  Of course, having the power is one thing.  How you use it is another. 

France had more tanks than Germany before the outbreak of hostilities.  But the Nazis quickly overran France.  Why?  Doctrine.  France’s doctrine was to hide behind the security of the Maginot Line.  It was a defensive-only strategy.  She developed no armored doctrine.  The lesson they learned from World War I was that armies killed themselves attacking fixed defenses.  Germany, too, learned that lesson.  So their doctrine called for going around fixed defenses with fast-moving armor spearheads with tactical air support (i.e., blitzkrieg).  Formidable though the Maginot Line was, it could not attack.  And if the Nazis didn’t attack it, it did nothing but concentrate men and firepower away from the battle.

WHEN WE PULLED out of South Vietnam, we agreed to use American air power if North Vietnam violated the terms of the treaty ending that war.  Watergate changed all of that.  Even though JFK got us into Vietnam, it became Nixon’s war.  And a vindictive Congress wouldn’t have anything more to do with it.  The North tested the American will.  Saw that there was none.   Attacked.  And overran South Vietnam.  The message was clear to tyrants.  America will quit in the long run.  Especially after a large loss of life.

Other ‘retreats’ would reinforce this perception.  Especially in the Arab world.  The withdrawal from Lebanon after the bombing of the Marines’ barracks.  The withdrawal from Somalia after the Somalis dragged dead American troops through the streets of Mogadishu.  The Arab world even saw the victory in Desert Storm as a retreat.  The anti-American Arab world said that our invasion was about oil.  That what we really wanted was to topple Saddam Hussein and take his oil.  It was just another Christian Crusade into holy Islamic lands.  When we didn’t do that, the Arab world saw it as another American retreat.  That America didn’t have the will to endure a bloody battle to conquer Iraq. 

So some in the Arab world would test America.  Al Qaeda.  Headed by Osama bin Laden.  They started small and became more daring.  World Trade Center bombing.  Tanzanian Embassy bombing.  Kenyan Embassy bombing.  Khobar Towers bombing.  The USS Cole attack.  And they paid little for these attacks.  America didn’t fight back.  But their luck ran out on September 11, 2001.  Because America finally fought back.

PUBLIC ENEMY NUMBER one, Osama bin Laden, belonged to the conservative Sunni sect of Islam called Wahhabi.  They have a large following in Saudi Arabia.  The Wahhabi have a delicate relationship with the Saudi Royal family.  They disapprove of the Western displays of wealth in the House of Saud. 

Al-Qaeda was a shadowy enemy.  We confronted them in the mountains of Afghanistan where the Taliban gave them a safe sanctuary.  We attacked.  Knocked the Taliban from power.  Drove al-Qaeda underground.  But we could not stop their funding.

Wahhabi money from Saudi Arabia financed 9/11.  And the money continued to flow.  The Saudis would not intervene on behalf of America.  They feared any crackdown on the Wahhabi could unleash a civil war.  So America needed leverage to get Saudi cooperation.  And they found it in an old nemesis, Saddam Hussein. 

A Sunni minority ruled Iraq.  The Saudis did not like Saddam Hussein.  However, they liked the balance of power he offered to Iran.  Iran was Shiite.  As much as the Saudis did not like Saddam, they disliked Shiite Iran more.  This was the American lever.

After some diplomatic gymnastics, the invasion of Iraq was set.  The Saudis thought we were bluffing.  They didn’t believe we would invade Iraq.  Never in a million years.  If we didn’t do it in Desert Storm when we had the force in place to do it and didn’t, there was no way the Americans would amass another coalition and redeploy forces to the region again.  Especially because America doesn’t like long, drawn out, bloody wars.  Which an invasion of Iraq would surely be.

They asked us to remove our forces from the Saudi bases.  We did.  Now they were getting nervous.  That was the political game.  Make some noise to show the Arab world you weren’t an American toady.  But, secretly, you want those American forces to remain.  That American presence did provide security.  And stability.  After the invasion of Kuwait, it sure looked like Saudi Arabia would be next.  It was only that large American force in the desert that changed that inevitability. 

The Americans invaded.  And conquered.  Now the Saudis had a vested interest in helping the Americans.  They needed them to be successful in Iraq.  To contain Iran.  The lever worked.  The Saudis stemmed the flow of Wahhabi money to al-Qaeda.  The invasion of Iraq proved to be one of the most effective battles in the war on terrorism.  

HISTORY HAS SHOWN that a balance of power can lead to peace.  It has also shown that a superpower can enforce a larger peace.  But it also has shown that there is good and bad when it comes to power.  The Romans could be cruel, but so were most in that time.  The road to empire, after all, started out simply as a quest to provide a buffer between Rome and the hostile barbarians on her borders.  Rome, then, expanded in pursuit of peace.  (Initially, at least.)  And then used her power to maintain peace.

Many view Great Britain as the successor to the Roman Empire.  And many view America as the successor to the British Empire.  These powers share many things (rule of law, an advanced civilization, political stability, etc.).  Perhaps the greatest, though, is a powerful military.  And how it was/is used.  As a powerful deterrent to an aggressor nation.  To protect trade routes.  To maintain peace.  Malign these empires/nations all you will, but the greatest periods of world peace were due to their military power.  And their will to use that military power.  Expensive as that was.  Is.

So, yes, wars are costly.  Peace, too.  Sometimes, though, we must fight wars.  But we can avoid a lot of them.  By a peace-time military force that acts as a deterrent.  Because there are bad guys out there.  Who only respect one thing.  And it isn’t diplomacy.  Often the only thing preventing them from waging a cruel war of conquest is a potent military and a willing leader to use it.  If a tyrant knows he will face a military consequence for acting, he may not act.  When he knows that consequence will be devastating, he will not act.  But if he knows a nation hasn’t the military power or the will to use military power, he will act.  Just as Hitler did.  As Mussolini did.  As Tojo did.  And as Osama bin Laden did.

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